US job growth unexpectedly surges in January as economy adds 517,000 new positions

U.S. hiring roared back to life in January as the labor market remained surprisingly resilient in the face of higher interest rates, scorching-hot inflation and mounting recession fears.

Employers added 517,000 jobs in January, the Labor Department said in its monthly payroll report released Friday, easily topping the 185,000 jobs forecast by Refinitiv economists. It marked the best month for job creation since July.

The unemployment rate, meanwhile, unexpectedly dropped to 3.4%, the lowest level since 1969. 

"Today’s jobs report is almost too good to be true," said Julia Pollak, chief economist at ZipRecruiter. "Like $20 bills on the sidewalk and free lunches, falling inflation paired with falling unemployment is the stuff of economics fiction. It’s almost as though we’re in a world with no tradeoffs."

MAJORITY OF WORKERS REGRET QUITTING DURING THE GREAT RESIGNATION

Stocks fell following the better-than-expected report as the stunningly strong data dashed investor hopes that the Federal Reserve will soon pause its aggressive interest-rate hike campaign. 

"The surprisingly, strong across-the-board January employment report shows that labor demand remains too hot for the economy’s own good and will embolden the Fed to raise rates more not less," said Kathy Bostjancic, the chief economist at Nationwide. "The risks are now that they might need to do more."

Job gains were broad-based in January, with leisure and hospitality leading the way in hiring, adding 128,000 new workers. That was followed by employment in professional and business services (82,000), government (74,000), health care (58,200) and retail (30,100).

Wages also posted solid growth last month: Average hourly earnings rose 0.3%, in line with expectations, and are up 4.4% from a year ago.

While monthly jobs data is always important, the Fed has been closely watching the reports for signs the labor market is moderating from its frenzied pace as policymakers try to wrestle inflation – which is still running near a 40-year high – back to 2%. 

The latest hiring figures underscore the delicate challenge facing the Fed, which could ultimately have no choice but to continue hiking rates. Chairman Jerome Powell has lauded the slow but steady decline in inflation, but told reporters at the conclusion of the Fed's two-day meeting on Wednesday that the labor market remains "extremely tight" and is still "out of balance."

"Payrolls blowing expectations out of the water adds more fuel to the Fed’s rate hike campaign," said Mike Loewengart, the head of model portfolio construction at Morgan Stanley Global Investment Office. "It’s going to get harder to argue that rate cuts may be in 2023’s future if the labor market is able to continue like this, especially considering that it remains to be seen how quickly inflation will fall, even if we have reached the peak."

The central bank has already approved eight straight increases, including four back-to-back 75-basis-point hikes, raising the federal funds rate to a range of 4.5% to 4.75%, the highest since 2007. Powell indicated that policymakers expect to deliver a "couple" more rate hikes this year and signaled that rates could remain elevated for "some time."

DEMOCRATS SLAM 'DANGEROUS' FED RATE HIKES, WARNING OF WIDESPREAD JOB LOSSES

Ticker	Security	Last	Change	Change %
I:DJI	DOW JONES AVERAGES	44910.65	+188.59	+0.42%
I:COMP	NASDAQ COMPOSITE INDEX	19218.16623	+157.69	+0.83%
SP500	S&P 500	6032.38	+33.64	+0.56%

Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending. 

The data comes on the heels of a series of notable layoffs, particularly within the tech industry: Amazon, Apple, Meta, Lyft and Twitter are among the companies either implementing hiring freezes or letting workers go. That could soon bleed into the broader labor market; Powell has made it clear that policymakers anticipate job growth will slow and unemployment could climb as they raise interest rates higher, but he has argued that an alternative where prices soar unchecked is worse.

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"I would say it is a good thing the disinflation we have seen so far has not come at the expense of a weaker labor market," he told reporters. "But I would also say the inflationary process you see underway is really at an early stage."